The Big Question for Tuesday, Jan. 6:

Obama’s tax cuts–how centrist is the president-elect?

See all responses here.

Daniel J. Mitchell, senior fellow, Cato Institute said:

President-Elect Obama reportedly will include $300 billion of tax relief in his so-called stimulus scheme. This supposedly will give fiscal conservatives a reason to vote for the proposal, but lawmakers who favor limited government should look before they leap – especially if they actually want to improve economic growth.

The key thing they should understand is that not all tax cuts are created equal. If policy makers want to boost growth, they need to reduce marginal tax rates on productive behavior such as work, saving, and investment. This is why the Kennedy and Reagan tax-rate reductions were successful. Unfortunately, all reports indicate that the Obama plan will revolve around a gimmicky idea to give $500-$1,000 of tax relief to every household. This is very akin to the tax rebates that President Bush pushed through in 2001 and 2008. But since these proposals did not reduce tax rates, there was no incentive to earn more or produce more – which is why those rebates wound up being ineffective.

In addition to repeating Bush’s mistake of ineffective tax relief, President-Elect Obama purportedly will give businesses greater ability to get refunds of taxes paid in prior years to make up for losses in 2008. That is not bad tax policy, but reducing the tax burden on income earned in prior years is not exactly a good way to boost incentives to earn more and produce more in 2009.

Another less-than-stellar feature of the plan is a proposal to give businesses special tax credits for hiring new workers – and maybe even tax credits for avoiding layoffs. This sounds tempting, but it inevitably would create a feeding frenzy of special tax advice as businesses figure out how to get their hands on some of the money by fiddling with their employment policies. Even left-leaning economists have admitted that the bulk of any tax savings will accrue to businesses – such as fast food restaurants – that already plan on adding new workers.

There are rumors of a few provisions that might actually help the economy grow faster. The Obama team is considering a policy of “bonus depreciation,” for instance, which temporarily would reduce the tax penalty on new investment. But pro-growth provisions are just a tiny slice of the overall package. Most of the money will be allocated to ineffective handouts and special interest gimmicks.

Proponents of “Keynesianism” will argue that the Obama tax cuts (as well as all the new spending) will put money in the pockets of consumers and that this will jump-start the economy, but this sophomoric analysis overlooks the fact that government cannot inject money into the economy without first borrowing money out of the economy (for more information, see this video).

The only good news is that President-Elect Obama’s tax proposals (at least the ones that will be in the phony stimulus bill) will not cause any real damage to the economy. That will happen at the end of next year when he plans on letting the economy get saddled with big increases in tax rates.